Shares of Ascena Retail Group Inc. (ASNA) fell nearly 11.7% during yesterday’s after-hours trading session on account of dismal fourth-quarter fiscal 2014 results and disappointing forecast for fiscal 2015 thereafter.
Battered by weak top-line performance and higher operating expenses, Ascena’s adjusted earnings from continuing operations plunged nearly 61.8% year over year to 13 cents per share. Moreover, adjusted earnings fell short of the Zacks Consensus Estimate of 18 cents per share.
On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 10 cents per share, down from 18 cents in the comparable quarter last year.
Quarter in Detail
Ascena’s net sales for the quarter declined 1.3% year over year to $1,182.4 million primarily due to continued soft traffic trends across all of its brands and a challenging retail environment. Moreover, quarterly sales came below the Zacks Consensus Estimate of $1,215 million.
The company’s comparable-store sales (comps), which exclude e-commerce comps, witnessed a 4% year-over-year decline. Including the e-commerce comps growth of 13%, Ascena’s combined total comps fell 2% year over year. E-commerce comps were boosted by new Web innovations, exclusive online offers and promotions.
Sales were mainly impacted by weak comps performance at Justice and Lane Bryant brands, partially offset by continued positive comps performance at Catherines and maurices brands. Brand-wise, comps at Justice and Lane Bryant stores declined 10% and 2%, respectively, while comps at Catherines and maurices brands improved 7% and 1%, respectively. Comps at dressbarn remained flat year over year.
Gross profit inched down approximately 1.1% to $647.2 million from $654.2 million in the prior-year period, while as a percentage of sales it expanded 10 basis points (bps) to 54.7% from the year-ago level. The year-over-year marginal rise in gross profit margin was mainly driven by rate improvement at dressbarn and maurices brands, which more than offset the reduced merchandise margin at Justice and Lane Bryant brands owing to clearance activities designed to attain desired level of inventory position.
During the quarter, buying, distribution and occupancy (BD&O) expenses rose 4.8% year over year to $206.5 million, while as a percentage of sales, it increased 100 bps to 17.5%. The surge in BD&O expenses was due to investments in designing and merchandising, and costs associated to the growth of Justice and maurices stores.
Selling, general and administrative (SG&A) expenses were $343.5 million, up 3.8% from the year-ago comparable quarter, while as a percentage of sales it expanded 150 bps to 29.1%. SG&A expenses rose due to rise in payroll expenses, increased headcount and initiatives undertaken to achieve synergies.
During the quarter, Ascena’s operating income on an adjusted basis fell 62.6% year over year to $32.5 million. Moreover, operating margin contracted 460 bps to 2.7% mainly due to lower sales and higher operating expenses.
Fiscal 2014: A Synopsis
The company’s sales for fiscal 2014 improved 1.6% year over year to $4,790.6 million. However, it fell short of the Zacks Consensus Estimate of $4,823 million. Adjusted earnings from continued operations plunged 20% year over year to $1 per share and came below than the Zacks Consensus Estimate of $1.04. On a reported basis, Ascena’s earnings for the fiscal came in at 81 cents per share compared with 93 cents reported in the year-ago quarter.
Balance Sheet
Ascena ended the fiscal with cash and investments of $156.9 million and long-term debt of $172 million. Shareholder equity at the end of the fiscal was $1,737.7 million.
Initiated Fiscal 2015 Outlook
Disappointed by lower-than-expected fourth-quarter and fiscal 2014 results along with the anticipation of a lasting competitive retail environment in the year ahead, Ascena provided dismal outlook for fiscal 2015.
The company projects earnings to come in the range of 90 cents to $1 per share, which is much lower than the Zacks Consensus Estimate of $1.21. This excludes the one-time, financing and acquisition-related charges toward integration and restructuring.
Further, Ascena expects comps to remain flat or increase modestly in fiscal 2015. Depreciation in the fiscal is projected to grow in the double-digit range and remain in between $210 million and $215 million. Effective tax rate is anticipated to be 37% instead of the 36% projected earlier.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is anticipated to grow in the mid-to-high single-digit range. EBITDA margin is expected to remain flat to improve 20 bps, while gross margin is projected to rise 80 to 100 bps in the fiscal.
The company intends to incur capital expenditure in the range of $350–$375 million. Moreover, it expects to open 30–40 new stores during the fiscal.
Ascena remains focused on undertaking its long-term strategic plans. Most of the brands are already operational in the company’s Ohio distribution center and it expects all its brands to be fully operational by Fall 2014. Also, the company introduced its e-commerce fulfillment center in the previous quarter and efforts are being made to meet consumers’ demand for all its brands by Spring 2015.
Other Stocks to Consider
Currently, Ascena carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry include Citi Trends, Inc. (CTRN), Express Inc. (EXPR) and Foot Locker, Inc. (FL). While Citi Trends sports a Zacks Rank #1 (Strong Buy), both Express Inc. and Foot Locker carry a Zacks Rank #2 (Buy).
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